Provisioning Norms

What are Provisioning Norms?

Provisioning norms are the rules that banks and other financial institutions must follow when setting aside money to cover potential losses on their assets. These norms are designed to ensure that banks have enough money to cover losses if their assets default.

Types of Provisioning Norms

There are two main types of provisioning norms:

• Specific provisioning: Specific provisioning requires banks to set aside a specific amount of money for each asset that is considered to be a high risk. For example, a bank might be required to set aside 10% of the value of a loan to a company with a poor credit rating.
• General provisioning: General provisioning requires banks to set aside a certain percentage of their total assets as a reserve against losses. For example, a bank might be required to set aside 2% of its total assets as a reserve.

MCQs on Provisioning Norms:

1. Which of the following is not a type of provisioning norm?
   • Specific provisioning
   • General provisioning
   • Profitability-based provisioning
   • Liquidity-based provisioning
   • Answer: Profitability-based provisioning
2. Provisioning norms are the rules that banks and other financial institutions must follow when setting aside money to cover potential losses on their assets.
   • True
   • False
   • Answer: True
3. There are two main types of provisioning norms: specific provisioning and general provisioning.
   • True
   • False
   • Answer: True
4. Specific provisioning requires banks to set aside a specific amount of money for each asset that is considered to be a high risk.
   • True
   • False
   • Answer: True
5. General provisioning requires banks to set aside a certain percentage of their total assets as a reserve against losses.
   • True
   • False
   • Answer: True

Conclusion

Provisioning norms are an important tool for managing risk in the banking system. By setting aside money to cover potential losses, banks can help to ensure that they have enough capital to remain solvent even if some of their assets default.

Here are some additional points to keep in mind about provisioning norms:

• Provisioning norms are a complex set of rules, and banks need to have a strong understanding of them to comply.
• Provisioning norms are constantly evolving to reflect changes in the financial markets and the risks that banks face.
• Provisioning norms are an important part of the international financial regulatory framework.